CHU KIT YUK AND ANOTHER v. COUNTRY WIDE INDUSTRIAL LTD AND OTHERS

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H E A D N O T E

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So-called "provisional" agreements for sale and purchase of interests in land usually (perhaps always) constitute immediately binding "land contracts" required to be in writing by section 3 of the Conveyancing and Property Ordinance, Cap. 219. In considering the effect of such written agreements the court should not receive evidence of the negotiations leading to the written agreement, or of the parties' intentions except as exhibited by the written agreement itself; nor should it receive any evidence tending to add to, vary or contradict the terms of the written agreement.

IN THE COURT OF APPEAL

1994, No. 126
(Civil)

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J U D G M E N T

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Power, V.-P. :

1. I will ask Godfrey J.A. to give the first judgment.

Godfrey, J.A. :

2. This is an appeal from an order (inaccurately described as a judgment) of H.H. Judge Yeung sitting as a Deputy Judge of the High Court, made by the judge on 5 July 1994 in proceedings for specific performance of several contracts for the sale of land.

3. There were in substance three parties to the proceedings before the judge. It will be convenient to refer to them respectively as "the vendor", "the first purchasers" and "the second purchasers".

4. The proceedings raised two issues.

5. The first issue was this. Did the first purchasers have specifically enforceable contracts with the vendor when they issued their proceedings for specific performance, or had their contracts gone? The judge decided this issue in favour of the first purchasers. The vendor now appeals.

6. The second issue, which arose only if the first purchasers did have specifically enforceable contracts, was whether the first purchasers should be postponed to their remedy of specific performance in favour of the second purchasers. The judge decided this issue in favour of the second purchasers. The first purchasers now appeal.

7. The facts (so far as it is necessary to rehearse them for the purpose of disposing of this appeal) may be stated as follows.

8. On 6 February 1991, the vendor, by two separate agreements, purchased from a developer two flats in the course of construction as part of the development, i.e.. Flats E and F on the 6th floor, Block 3, Orchid Court, New Town Plaza, Phase III, Shatin, N.T. at the prices of $1,313,000 and $1,329,100 respectively. The vendor paid, in the case of Flat E, a deposit of $131,300, leaving a balance of $1,181,700, which was to be paid on or before 26 February 1991. The vendor paid, in the case of Flat F, a deposit of $132,910, leaving a balance of $1,196,190, which was also to be paid on or before 26 February 1991.

9. Each of the agreements of 6 February 1991 contained a provision that, notwithstanding anything to the contrary contained in the agreement, the purchaser under the agreement should, at any time before the completion of it, be entitled to sub-sell the premises: see clause 10(i). It provided that time should in every respect be of the essence of the agreement: see clause 15. It provided that if the purchaser under the agreement should fail to make the payment due on 26 February 1991, the developer might give to the purchaser under the agreement notice in writing, calling upon it to make good its default; and in the event of its failing within 21 days from the date of such notice fully to make good its default, the developer might, by a further notice in writing, forthwith determine the agreement: see clause 16.

10. The sums due on 26 February 1991 were not paid and, accordingly, there was a risk that pursuant to these provisions the developer would forfeit and the vendor lose the deposits paid under the agreement.

11. In that state of affairs, on 11 March 1991, the vendor entered into provisional sale and purchase agreements with the first purchasers. The terms of these agreements are crucial to a determination of the first issue in the case. I propose to set them out more or less in full as they appear in the English translation with which we have been provided.

12. In each case the "agreement" is in a printed form headed: "Century Property Consultants, Estate Agents, Surveyors, Valuers & Development Consultants", and leaving blanks to be filled in where appropriate. This is a form of the sort used by brokers for the purposes of carrying on their own business, and presented to prospective vendors and purchasers for the purpose of ensuring that the brokers get their commission.

Vendors and purchasers under such forms usually (perhaps always) intend to become immediately bound by contract to the sale and purchase to which the form relates.

13. The vendor; the purchaser in each case; and the property are all identified. The price is stated; in each case the stated price is the same as that stated in the 6 February 1991 agreements. There is a reference to a provisional deposit paid, of HK$50,000. There is a reference to "Formal Sale and Purchase Agreement". It reads (in the case of Flat E):

"Formal Sale & Purchase Agreement will be date 12-3-1991 or before & pay HK$81,300.00 at their own solicitor Woo, Kwan, Lee & Lo [those words were deleted] Sun Hung Kai Developer)."

Beneath that appears "Completion of the Transaction". This reads:

"The balance should be paid upon completion date__________or before at venue: Woo, Kwan Lee & Lo Solicitors Date of Vacant Possession According to Developer's Instruction."

14. There is then set out what were described as "Terms and Conditions" as follows:

"1. The Purchaser has to pay the transfer fees. The Vendor has to pay the legal cost for the cancellation of the previous agreement (For building under construction only).

2. Each party will bear its own legal cost.

3. If the Purchaser fails to perform this agreement after the time has expired, the deposit paid by the purchaser will be forfeited by the Vendor and the Vendor shall have the right to resell this property to other parties. Then neither party shall hold the other party responsible for anything further.

4. If the Vendor fails to perform this agreement after the time has expired, the Vendor should pay double of the provisional deposit to the Purchaser, i.e. (HK$100,000.00). Then neither party shall hold the other party responsible for anything further.

5. If either the Vendor or the Purchaser fails to perform this agreement, the defaulting party should pay our Company's fee of (HK13,130)[deleted] HK$14,730[substituted]."

15. There then follows a section for "Remarks", left blank in the printed form, but completed in manuscript as follows:

"Both parties agreed that they should go to the Developer Sun Hung Kai Properties on 12-3-1991 to perform the procedure for transfer of names and the Purchaser agreed to pay to the Vendor Hong Kong Dollars One Hundred and Sixty Thousand as position queuing fees."

16. Finally, there appears a receipt for the deposit of $50,000 and the form is signed by the purchaser, the broker and the vendor.

17. All this requires just a little explanation; and I do not think I can do better in this connection than to adopt the words used by Mr. Simon Westbrook, counsel for the vendor at the trial and before us, when cross- examining Mr. Hai, one of the plaintiffs' witnesses. Mr. Westbrook put this question to the witness:

"Now in the nature of your business, you presumably knew already that there were two obvious ways of effecting the sale and purchase of this flat. One method was to go to the developer and have your name substituted for the original purchaser - that is, Country Wide. The other method was to let Country Wide complete its sale with Sun Hung Kai and then you pay by way of sub-sale from Country Wide."

18. Mr. Hai answered:

"Yes, I knew that there were these two methods."

19. I return to the narrative.

20. On 12 March 1991, the parties' representatives attended at the developer's office (as contemplated) for the purpose of effecting the "transfer of names" referred to in the "Remarks" section of the form. (Put in legal language, this was an arrangement which contemplated a novation of the original contract whereby the "transferee" would be substituted for the vendor by cancellation of the original agreement and by the entry by the developer into a new agreement with the transferee.)

21. But this failed. There is little, if any, admissible evidence as to precisely why it failed but it is plain that since the payments due to have been made on the 26 February 1991 had not been made, the vendor, as purchaser under the agreements of 6 February 1991, was in a difficult position. It was at risk, if payment was not made soon, of losing its purchases altogether. It was in no position to dictate to the developer the terms on which the developer should be prepared to agree to a novation. If the developer was to insist, as one would expect that it would insist, on some payment on account of interest on the money which should have been paid on 26 February 1991, that would be a demand under which the vendor would have to knuckle.

22. But it is not necessary to speculate further about this. The fact is that the developer did not agree to the novation; or if it did, it did not agree to the novation on acceptable terms. The vendor then refused to go on with its sales to the first purchasers.

23. On 13 March 1991, the next day, the vendor entered into provisional agreements for sale and purchase of the same flats with the second purchasers.

24. On 16 March 1991, the first purchasers registered their contracts.

25. On 19 March 1991, the second purchasers entered into formal sale and purchase agreements by way of sub-sale with the vendor.

26. On 18 March 1991, the first purchasers' solicitors wrote to the vendor in the following terms in relation to Flat E (they wrote similarly in relation to Flat F):

"We act for Chu Kit Yuk [the first purchaser of Flat E] in connection with a purchase of the above premises.

By a Provisional Agreement for Sale and Purchase dated 11/03/91 (copy enclosed) you agreed to sell the premises to our client for $1,313,000.00. The transaction would be effected by your procuring the Developer to accept our client as the new purchaser in your place. It was agreed that our client should pay your company a sum of $160,000.00 for your effort in procuring the Developer to accept our client as the new purchaser. It was also expressly stated that our client shall pay the transfer fee charged by the Developer but other than that each party shall pay his own costs for the transaction.

We are instructed that, in breach of your agreement, your company have failed to procure the Developer to accept our client as the new purchaser. As a result of this, your company proposed to effect the transaction by sub- selling the premises to our client. Your company also added some unreasonable terms in sub-selling the premises, including the following:-

1. that our client shall pay for your company's legal costs in the sub-ale; and

2. that our client shall pay all overdue interest which is payable by your company to the Developer under the Principal Agreement for Sale and Purchase.

We are instructed to advise you that the above additional terms are not acceptable to our client."

27. The letter then proceeded to propose a sub-sale on different terms into which I do not think I need to go. It went on to say:

"We consider that a reasonable time frame would be for the parties to sign a Sub-Sale Agreement within 10 days from the date when your solicitors send us the draft Sub-Sale Agreement, and for our client to pay the balance of the purchase price within 14 days after the signing of the Sub-Sale Agreement.

We reiterate that our client is sincere and capable of performing the contract and look forward to receiving the draft Sub-Sale Agreement from your solicitors soon. In the meantime we have, in accordance with our client's instructions, registered the duplicate Provisional Agreement at the District Land Office to secure her interests in the matter."

28. The first purchasers did not inform the second purchasers (when they got to know of their existence) of their intention to proceed; and the second purchasers in due course paid what was necessary to satisfy the developer. In those circumstances the sub-sale agreements were entered into between the vendor and the second purchasers.

29. The judge found, as I understand his judgment, that (with one exception) everybody involved in all this was really involved in these transactions in order to make a profit, not in order to occupy the premises personally.

30. Now, in these circumstances, it fell to the judge, and it falls to us, to consider the true construction of the agreements made on the terms of the forms dated 11 March 1991.

31. It might be that an arrangement such as had apparently been contemplated could have been effected by a form of contract which did not amount to a contract for the sale of land at all; that is to say, a contract whereby, for a consideration, the vendor would procure, or attempt to procure, the desired novation of the original contract. But whatever effect such a contract may have had, we do not have to consider; because it is common ground between the parties that the forms used here did constitute agreements for the sale and purchase of land. They are accordingly "Land contracts to be in writing": see the rubric to s.3 of the Conveyancing and Property Ordinance, Cap. 219.

32. If either side were to allege that there were some oral term which was part of the agreement but not incorporated into the written form, it would be in considerable difficulties because, even if it pleaded and proved such a term, it would be met with the answer that, since the term did not appear in the writing, it could not enforce the contract.

33. But I need not go into that. I am satisfied that, as immediately binding contracts for the sale and purchase of land, the only essential feature of these forms was that the purchasers under them, on paying what was due from them, should obtain the benefit of whatever interest it was that the vendor had to sell.

34. For my part, I take it to be a matter of mere machinery how that result was to be achieved. On a different form of agreement, I might have come to a different conclusion; but on this one, it seems to me that the correct conclusion, as a matter of construction, is that the forms are providing for the sale and purchase of the vendor's interests in the land with a preferred machinery by which that is to be effected, the preferred machinery being the machinery of novation. It was no doubt the case, as Mr. Westbrook reminded us more than once in the course of his elegant and urbane argument, that there would be financial implications adverse to the vendor if the transaction was to proceed by way of sub-sale rather than by way of novation. But, as it seems to me, that has nothing to do with the process of construction of the forms in question. Once it is accepted, as Mr. Westbrook had to accept, that these forms constituted contracts for the sale and purchase of the vendor's interest in the land, then, unless the contract was to be construed as providing that the only way in which the transaction could be the effected was by novation, the first purchasers must be entitled to succeed. It seems to me impossible to construe what is said in the "Remarks" section of the form as providing that there is to be no other way but the process of novation for the performance of the agreement for sate and purchase, so that, if that process were to fail for any reason, then the whole contract would be frustrated. In deed, it seems to me that, since it is the vendor's case that the parties' agreement was that the sale should take effect by way of novation only, it is the vendor who is seeking to add to the terms of the written agreement, not the first purchasers.

35. For these reasons, I am of the opinion that the first purchasers have established as against the vendor binding contracts for sale and purchase which still subsisted at the date when the proceedings were commenced.

36. I do not think it is necessary further to analyse the legal reasons for the conclusion to which I have come; which rests wholly and exclusively on the simple process of construction of the forms in question. Indeed, for my part, I think that the attempts made in the court below to ascertain by means of oral evidence what it was that the parties really intended when they signed these forms were wholly improper. The evidence so elicited was inadmissible, Extrinsic evidence of the parties' intentions, in order to resolve what was intended by the words used in their written agreement, is never admissible, especially if tendered to contradict, vary or add to the words of such an agreement.

37. I pass then from the first issue, which I would decide, as did the judge, against the vendor and in favour of the first purchasers, to the second issue, which is really whether, as between the first purchasers and the second purchasers, the first purchasers ought to recover the property and the second purchasers ought to be left to their remedy in damages as against the vendor, or whether the boot should be on the other foot, that is to say, that the second purchasers should recover the property and the first purchasers should be left to their remedy in damages as against the vendor.

38. The judge, treating this purely as a matter of discretion at large, came to the conclusion that the second purchasers were to be preferred; but I have to say that I believe that in doing so he failed to apply the correct principles and so went wrong. We are therefore entitled and indeed bound to review the exercise of his discretion. I for my part come to my own conclusion, in favour of the first purchasers, for the following reasons.

39. Whenever a vendor sells land twice over, he creates two competing equitable interests in the land. The first purchasers acquire an equitable interest in the land under their contract. So do the second purchasers. But the rule is that, where the equities are equal, the first in time prevails. Accordingly, the first purchasers must be preferred to the second purchasers, when it comes to which of them has the better right to specific performance, unless the equities are not equal. If, for some reason, the second purchasers have the better equitable right, they will be preferred to the first purchasers. How can that arise? It can certainly arise if the conduct of the first purchasers has been unconscionable, or inequitable; if, for example, they have led the second purchasers on, or in some other way behaved in relation to the second purchasers in a manner which warrants the disfavour of the court, then they can and indeed should be postponed to the second purchasers.

40. Mr. Chan, on behalf of the second purchasers, in an attractive argument, submitted that that was what had happened here. He said that the first purchasers had stood by and done nothing except let his clients, the second purchasers, put up the money demanded by the developer so as to keep the seat warm for the first purchasers when the time arrived for completion.

41. For my part, I find it impossible to look at the matter in that way. All that happened, so far as the evidence went, was that the second purchasers jumped in, when the vendor put the property back on the market again, and did what the first purchasers had refused to do, put their hands into their pockets for more money so as to preserve the original contracts from forfeiture by the developer. The first purchasers, as it seems to me, were under no obligation, legal or moral, to take any steps to protect the second purchasers from doing that. I see no reason at all to treat the first purchasers as having behaved in an unconscionable or inequitable way in relation to the second purchasers such that their earlier equity ought to be postponed.

42. An alternative way in which the case was put by Mr. Chan for the second purchasers was this. It is, sometimes, a defence to an action for specific performance for the vendor to show that hardship will be caused if the decree of specific performance is granted. Of course, in most cases, the hardship which will be relied on by a vendor in these circumstances will be hardship to himself. But there is some authority suggesting that the court will sometimes entertain a plea from a third party that his interest would be so seriously damaged by the grant of specific performance against the vendor that such an order ought not to be made.

43. The authority is scanty. In my judgment, it will only be in a most exceptional case that, on the ground of hardship to the second purchaser, the court will refuse a decree of specific performance to the first purchaser. I can envisage situations in which this might be so; e.g. if the second purchaser is an old lady in the declining years of her life and has been in possession for a considerable time under her contract, I can see that the court might well refuse to order for specific performance in the first purchaser's favour. But as to the parties in the present case, all or most of whom were no doubt looking only for a quick turn on a rising market, I waste no tears on any of them. I do not think any hardship of the sort I have described has been established by the second purchasers.

44. The judge approached the matter in a different way. He seems to have thought that the right exercise to perform was simply to consider which was the party who in justice should on balance be preferred. Should it be the first purchaser or should it be the second purchaser? He thought that the balance came down in favour of the second purchaser. That exercise seems to me to have been the wrong exercise. If it had been the right exercise, I would have refused to interfere with it. But since it was the wrong exercise, I am satisfied that we ought to interfere by performing the right exercise, which is simply to ask ourselves these questions: first, is there any reason why the first purchasers should be postponed to the second purchasers, notwithstanding the rule that where the equities are equal the first in time is to prevail? Secondly, is there any sufficient ground for the second purchasers' plea of hardship such as to justify refusing a decree of specific performance to the first purchasers despite their prior equitable right? Performing that exercise, it seems to me, leads for the reasons I have already given to only one possible answer, which is that it is the first purchasers who should be awarded specific performance and the second purchasers who should be left to their remedy in damages. (It may be that as Mr. Chan faintly urged, the vendor will turn out, at the end of all this litigation, not to be good for the money; but that is not a circumstance in which we can take into account in considering the question of hardship which we have been asked to consider.)

45. For the reasons I have endeavoured to state, I would dismiss the vendor's appeal; and I would allow the appeal of the first purchasers postponing them to the second purchasers so far as the remedy of specific performance is concerned. I would add only a word of thanks to Mr. Simon Westbrook for his extremely able albeit unsuccessful argument on behalf of the vendor.

Mortimer, J.A. :

46. I also would dismiss the vendor's appeal and allow the first purchaser's appeal.

47. I have listened with care to the words that have fallen from Godfrey J.A. I find myself in complete agreement not only with his conclusions but also his reasoning. Although we are differing from the judge below on the exercise of his discretion, I am in such agreement that anything I add would be unnecessary.

48. Before leaving this case I would say two things. First, to echo what Godfrey J.A. has said about the admissibility of evidence in cases where there is a written contract, appreciating at the same time, the difficulties which sometimes face both counsel and the judge in applying those rules. Secondly, I also add my thanks to counsel for their particular assistance.

Power, V.-P. :

49. I concur with what has been said by my brethren. I have nothing to add.